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On 29 May 2020, the long-awaited Commercial Tenancies (COVID-19 Response) Regulations 2020 (WA) (Regulations) were published in the Western Australian Government Gazette. The Regulations support the Commercial Tenancies (COVID-19 Response) Act 2020 (WA) (Act). See our earlier alert in about the provisions of the Act (New laws impacting tenants and landlords of commercial tenancy leases in WA).

Following the similar implementation of legislation in the other States and Territories, Partner, Catherine Wheeler and Law Graduate, Lily Robinson discuss how the Regulations adopt a code of conduct for commercial leasing principles to assist tenants and landlords of small commercial leases* in reaching agreements about rent during the COVID-19 pandemic (Code). 

The commercial leasing principles include:

• the obligations of landlords and tenants;
• the process for negotiating rent relief;
• the principles applying to rent relief; and
• the principles applying to outgoings and other expenses.

*A small commercial lease is defined in the Act and comprises retail shop leases under the Commercial Tenancy (Retail Shops) Agreements Act 1985, leases where the tenant owns or operates a small business (as defined in the Small Business Development Corporation Act 1983, essentially a business undertaking wholly owned and operated by individual persons or if a company managed personally by the owners or directors), leases where the tenant is an incorporated association and other leases as prescribed.

Who does the Code apply to?

The Code applies to landlords and tenants under a small commercial lease where the tenant is an eligible tenant. 

A tenant is an eligible tenant if:

• turnover of the tenant’s business, franchise or group (being related bodies corporate) is less than $50,000,000 in the 2018/2019 financial year; and
• the tenant either: 

1. qualifies for the JobKeeper scheme under the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth); or 
2. has experienced a reduction in turnover of at least 30% at any time during the emergency period (six months from 30 March 2020). 

Small charities, however, need only have experienced a 15% reduction in turnover.

Overarching obligations of landlords and tenants

To assist landlords and tenants negotiate rent relief during the COVID-19 pandemic, the Code requires that landlords and tenants must:

• cooperate;
• act reasonably and in good faith;
• act in an open, honest and transparent manner;
• provide each other with sufficient and accurate information for the purposes of negotiations; and
• not make onerous demands for information.

Requesting and negotiating rent relief

The process for negotiating rent relief can be broadly broken down into the following stages:

Tenant request

An eligible tenant may during the emergency period make a written request to their landlord for rent relief.
The request must be accompanied by:

• a statement by the tenant that the tenant’s lease is a small commercial lease and the tenant is an eligible tenant; and
• sufficient and accurate information that evidences the above and the tenant’s reduction in turnover during the emergency period.

Landlord response

A landlord must offer rent relief to the eligible tenant within 14 days of receiving a complying request or such other period as is agreed. The offer must meet the following principles: 

• an offer of rent relief must apply to the emergency period;
• the rent relief offered by the landlord must at least be proportionate to the reduction in the tenant’s turnover during the emergency period;
• an offer of rent relief may relate to up to 100% of the rent payable under the small commercial lease;
• an offer of rent relief must include a waiver of at least 50% of the rent (unless otherwise agreed by the tenant and landlord in writing);
• an offer of rent relief must include a waiver of more than 50% of the rent in cases where a lower waiver would compromise the tenant’s ability to fulfil its ongoing obligations under the small commercial lease and the landlord has the financial means to provide a higher waiver; and
• if the small commercial lease is a sublease and the landlord is provided rent relief under the head lease, this relief must be passed on to the tenant of the sublease.

Negotiation

After receiving the landlords offer, the landlord and tenant must negotiate the specifics of the rent relief in accordance with the abovementioned principles with a view to agreeing on the rent relief to apply.

Renegotiation

After successfully negotiating rent relief, if the financial position of the eligible tenant materially changes, the tenant is permitted to make a request to the landlord to renegotiate the rent relief and the process repeats. 

An eligible tenant who entered into a rent relief agreement with their landlord prior to the adoption of the Code may make a request for rent relief under the Code, if they believe that the current agreement is less favourable than it would have been if negotiated in accordance with the Code, and the above process must be followed.

Payment of deferred rent

If rent payable under a small commercial lease is deferred, then unless otherwise agreed in writing by the landlord and tenant, a landlord must not request payment of the deferred rent until either the day on which the emergency period ends or the day the term of the small commercial lease expires, whichever comes first. Further, payment of the deferred rent is to be made by instalments amortised over either the balance of the term of the small commercial lease or a period of at least two years, whichever is greater.

Outgoings and other expenses

In addition to negotiated reductions in rent, the Code seeks to help landlords and tenants negotiate reductions in outgoings and other expenses during the COVID-19 pandemic. For example, where an eligible tenant is not able to trade during the emergency period, the Code requires that landlords consider waiving recovery of outgoings and other expenses during that period.

The landlord must also pass on proportionate cost savings if outgoings imposed on the premises are reduced.

Comments

It is hoped that the adoption of the Code will provide some certainty to landlords and tenants so that they can successfully negotiate and document rent and other relief during the emergency period. 

Whether the emergency period will be extended beyond 29 September 2020 remains to be seen.

If you would like further information in relation to these Regulations and how they may impact your tenancy, please contact our Commercial Property team.